Mercatus Site Feed en All Taxes Start as Good Intentions, but Don't End That Way <h5> Expert Commentary </h5> <p class="p1">Good intentions are one of the least scarce resources on the planet. The trick, of course, is put all those good intentions to work in ways that actually achieve desired goals. In a world where virtually every other resource is in short supply, the targets of one’s good intentions must be focused on actions that address the most pressing issues.</p> <p class="p1">The “Chicago Sweetened-Beverage Tax,” now being considered by the city’s Health and Environmental Protection Committee, is long on good intentions and short both on prioritization and on understanding of the economic principles of public finance.</p> <p class="p1">The ordinance, introduced at the end of July, will, if passed, impose an excise tax of one cent per ounce on all sugary soft drinks sold within the city’s limits to curb consumption of “the number one source of sugar in the American diet.” As the ordinance’s preamble states, “numerous studies” have implicated sugar as contributing to a modern obesity “epidemic, along with the health problems associated with excessive body weight, including Type II (adult-onset) diabetes, asthma, and heart disease.</p> <p class="p1">The proposed ordinance assumes that a one-penny per ounce tax will lead to a 23.5 percent reduction in retail sales of sugar-sweetened beverages (SSBs), whether pre-bottled or mixed from syrup or powder at restaurants and convenience store fountains, purchases of which are subject to the same penny per ounce tax. A 23.5 percent reduction in sales, in turn, is projected to lower youth obesity rates by 9.3 percent and to cut them by 5.2 percent in adults.</p> <p class="p1">That estimate of a nearly one-fourth drop in sales assumes that (1) the new excise tax will be passed on fully to consumers in higher retail prices (a 12 cent increase for a 12-ounce serving, which works out to a 12 percent price hike if an untaxed container costs $1.00), (2) consumers will not respond by switching to (untaxed) diet sodas, which mounting evidence shows to be just as unhealthful as sugary soft drinks, or (3) buy untaxed or lesser taxed SSBs beyond Chicago’s city limits.</p> <p class="p1">None of those assumptions is warranted. A study of the impact of a similar SSB tax implemented in Berkeley, Calif., on January 1, 2015, found that only 22% of the tax there – not 100% – found its way into higher retail prices. Our own research, published by the Mercatus Center, suggests that a 12 percent increase in SSB prices triggers only about a 6 percent reduction in retail sales.</p> <p class="p1">The tax supporters’ good intentions thus will fall far short of expectations.</p> <p class="p1">How will the projected SSB tax revenue be spent? Most of it is dedicated to a special “Wellness Fund” created by the same ordinance. Twenty percent of the fund’s receipts will sponsor studies on obesity and 75 percent will be spent on educational programs emphasizing the benefits of healthy eating and physical fitness. The revenue therefore largely will flow to educators and researchers, not ordinary people.</p> <p class="p1">Between one and two percent of the revenue is earmarked for studies of the tax’s actual effects on Chicagoans. But scholars of public finance already have documented the effects of selective excise taxes on producers and consumers, not just in theory, but also in practice.</p> <p class="p1">It likewise is well known that the burdens of selective excise taxes on sugary drinks, like all retail taxes, fall heaviest on low-income households. Berkeley tried to avoid the regressive effects of its SSB tax by exempting soda purchases made with food stamps, but we also know that poor people disproportionately suffer the health consequences of poor diet choices.</p> <p class="p1">Finally, we also know that reelection-seeking politicians will raid any public treasury account like the “Wellness Fund” whenever other budget priorities become more salient. Does anyone expect the Wellness Fund to be spent as intended if potholes in Chicago’s streets must be filled or if the pension funds for police and firefighters go deeper into the red?</p> <p class="p1">We think not. We also think that Chicago’s proposed SSB tax, although grounded in good intentions, simply is another political ploy to raise revenue on the backs of poor Chicagoans who are less able to pay it than commuters and middle and upper income households.</p> Thu, 08 Oct 2015 14:18:24 -0400 Medicare Does a Bad Job Setting Fees <h5> Expert Commentary </h5> <p class="p1">Traditional "fee-for-service" (FFS) Medicare — which pays providers a fee for each service delivered — is the nation's largest health-insurance program, enrolling 38.1 million aged and disabled beneficiaries in 2014. The program pays more than 200 million claims for inpatient hospital admissions and home-health-care visits each year, and 1 billion claims for doctors' services. There are about 10,000 different services for doctors alone, and each of these fees is set through an administrative process that attempts to discern the cost of producing that service — called the "relative value" — in terms of the costs of physician work, practice expenses, and liability insurance.</p> <p class="p1">Not surprisingly, Medicare fees substantially influence the prices that private-sector insurers pay for services. To save time and effort in developing their own fee schedules, many private payers have adopted the Medicare fees outright. And when Medicare raises its fees, private insurers have to go along to some degree, or else providers will become less likely to see privately insured patients.</p> <p class="p1">But FFS Medicare does a bad job of setting these fees. A&nbsp;<a href=""><b>new analysis</b></a> that we conducted for the <a href=""><b>Mercatus Center</b></a> at George Mason University explains why — and suggests how to fix the system.</p> <p class="p1">We focused on the fees for doctors' services, although much of our analysis applies to the fees that Medicare pays for hospital admissions as well. For doctors, the program has struggled for many years to increase the value of "evaluation and management" services — think of these as "primary care" — in relation to tests and procedures. Evaluation and management services are vital for managing the health of aged and disabled Medicare beneficiaries, many of whom have multiple chronic health problems.</p> <p class="p1">In principle, Medicare could collect fine-grained data on medical costs from a representative sample of physicians. Instead, the data are collected, and updates to the fees are recommended, by a private body whose committees are drawn disproportionately from the major specialty societies. This body, known as the Relative Value Scale Update Committee or RUC, resists rebalancing the fees, despite advances in technology that have reduced the cost of tests and procedures.</p> <p class="p1">Conflicts of interest are not the only problem with the fee-setting process. The RUC relies on flawed surveys to determine the relative values of different services. It sometimes cherry-picks the results if the data are deemed to be flawed or incomplete. And it often uses unrealistic assumptions that inflate the cost of the equipment that is used for diagnostic testing.</p> <p class="p1">Part of the blame can be laid at the door of the Centers for Medicare and Medicaid Services, the government agency that oversees Medicare and reviews the recommendations coming from the RUC, though its performance has improved in recent years. In the past, CMS almost always accepted the RUC's recommendations, but substantial changes in the oversight process have given the agency more authority and funding. It now accepts only about half of the RUC's recommendations.</p> <p class="p1">But even if CMS could collect unbiased data and evaluate it in a neutral manner, the fee-setting process still would be flawed until its deeper assumptions were challenged. Most important is the assumption that physicians' fees should be based on administrative data, in an attempt to create a semblance of market prices.</p> <p class="p1">Medicare fees indeed should reflect market prices. Unfortunately, it's impossible for a government agency to set prices that replicate those resulting from millions of independent transactions between buyers and sellers in a competitive market. But CMS can do better, by harnessing the power of actual competition instead of relying on administrative data.</p> <p class="p1">We suggest having providers bid on the fee schedule or bundles of services, and then using the bids to set Medicare fees. Providers could set their prices wherever they liked, but those with higher bids would be placed in higher tiers. Medicare beneficiaries would pay higher out-of-pocket costs for providers in higher tiers — a strategy that has worked in the private sector. This already happens to some extent with hospital admissions, but it could be extended to bundles of services that include outpatient care.</p> <p class="p1">For this system to be effective, beneficiaries would have to care about the higher cost of higher-tier providers. This form of exposure has been difficult in the past, because many FFS Medicare beneficiaries buy "Medigap" policies that cover some out-of-pocket costs. A key part of any reform must be to prevent these policies from insulating beneficiaries from the added cost of more expensive providers — providers we know are more expensive because <i>they have told us so,</i> in their bids.</p> <p class="p1">Medicare needs to find a new way to set fees. A bidding system could be the solution — but for this to be successful, beneficiaries must have some skin in the game.</p> Thu, 08 Oct 2015 09:56:16 -0400 Speak Now, Congress, or Forever Maintain the Status Quo <h5> Expert Commentary </h5> <p style="text-align: left;" class="p1">The House of Representatives is looking for a new speaker. Such times of change present a perfect opportunity for Congress to reflect on what it should aspire to achieve.</p> <p style="text-align: left;" class="p1">On top of the list is getting control of our fiscal situation by restraining government spending in ways that are consistent with a healthy and vibrant private sector. This will also make better tax policy more likely and help restrain debt levels.</p> <p style="text-align: left;" class="p1">As we know, the drivers of our Greek fiscal future are so-called entitlement programs, such as Medicare, Social Security, Medicaid and Affordable Care Act subsidies. Though there is little chance of a short-term political victory with a divided government, Congress should nonetheless move some real reform proposals through committees to get the ball rolling.</p> <p style="text-align: left;" class="p1">The free market movement has provided many reform ideas over the years, so lawmakers have plenty of options to choose from. On Social Security, they range from private accounts to an expansion of Roth IRAs or traditional individual retirement accounts. On health care, they range from freeing the provision of health care from government-imposed constraints that cause ever-rising costs to Rep. Paul Ryan's plan and medical savings accounts. Many plans have also been proposed to replace or repeal the Affordable Care Act.</p> <p style="text-align: left;" class="p1">Regarding tax policy, one of my favorite options so far is a system of universal savings accounts like what Canada has. The Cato Institute's Chris Edwards explains: "Such accounts would be like (Roth IRAs), but for all types of savings, not just retirement savings. People would contribute after-tax income to USAs, and then all earnings and withdrawals would be completely tax-free." In other words, you could save for your retirement, kids' college education, vacations or health care spending in one flexible account. It could also be a good alternative to Social Security and other failing programs.</p> <p style="text-align: left;" class="p1">Universal accounts would also kill (or at least wound) three birds with one stone — addressing our tax code's punishing double taxation of savings, encouraging savings and boosting personal financial security.</p> <p style="text-align: left;" class="p1">That leads me to fundamental tax reform.</p> <p>Tax reform is always on any Republican candidate's "if you vote for me" promise list, but the current Congress has failed to advance a comprehensive tax reform agenda — and that in spite of the biggest majority since 1928. Our tax code is complex and burdensome; it has 80,000 pages; it's expensive to understand and comply with; and it's a serious inhibitor of growth and innovation. It's also biased toward special interests.</p><p style="text-align: left;" class="p1">It should be easy to come up with legislation that free market Republicans could support, seeing as many of the Republicans running for president have issued their own plans to get rid of special carve-outs, lower the rates and end the tax code's biases against saving and investment.</p> <p style="text-align: left;" class="p1">On the spending front, the biggest victory of the past seven years has been the implementation of spending caps, which in turn led to a certain level of budget restraint. These limits should stay in place, even if it means aggravating defense hawks and President Barack Obama. It would send a strong signal that this Congress is serious about fiscal responsibility.</p> <p style="text-align: left;" class="p1">Indeed, the caps could be expanded, as proposed by Rep. Kevin Brady's MAP Act. The lawmaker from Texas would extend the caps to cover so-called mandatory spending. And his plan should have broad GOP support because the defense budget no longer would be disproportionately impacted.</p> <p style="text-align: left;" class="p1">Finally, we can only hope that the current change in Congress will encourage a true dialogue about the need to move away from the many programs that exist for the sole purpose of boosting a few companies or an entire industry's bottom line. Special interest politics is bad economics and bad policy. A first step would be, of course, to keep the Export-Import Bank closed permanently and to move forward with a plan to wind down its activities.</p> <p style="text-align: left;" class="p1">There is much more to do — for example, fundamentally reforming the way we fund highways, addressing overregulation and freeing higher education from the nation's accreditation cartel — but those are some good conversation starters.</p> Thu, 08 Oct 2015 09:45:40 -0400 Scottsdale Supporter and Friend Lunch <h5> Events </h5> <p>In <a href="">new research for the Mercatus Center at George Mason University</a>, Senior Research Fellow&nbsp;Eileen Norcross&nbsp;ranks each U.S. state’s financial health based on short- and long-term debt and other key fiscal obligations, including unfunded pensions and health care benefits. The study, which builds on&nbsp;previous Mercatus research about state fiscal conditions, provides information from the states’ audited financial reports in an easily accessible format, presenting an accurate snapshot of each state’s fiscal health.</p><p>Arizona’s position in the rankings? Number 32.</p> <p>Join us for a lunchtime discussion as Eileen explains what criteria were used to determine Arizona’s ranking, what’s keeping Arizona in the bottom half of the rankings, and what policy changes would help the state improve its fiscal health.</p> <p>This is not a fundraising event, and there is no charge to join us. We are pleased to have you as our guest to show our thanks and appreciation to our donors. Dress is business casual. Please invite friends or associates who might be interested.</p><p>To RSVP for this event, please contact Matthew Owens at <a href=""></a> or 703-993-9062.</p> Mon, 05 Oct 2015 15:53:24 -0400 Sarasota's Anti-Regulation Vote Settles the Uber-Taxi Feud <h5> Expert Commentary </h5> <p class="p1">Last month in Florida, the <a href="">Sarasota City Commission did the unthinkable</a>. It unanimously voted to end unnecessary regulation of taxis in its city. In an era where the political feud between taxis and ridesharing companies seems to reach new heights every day – and has already boiled over into violent protests in <a href="">France</a>, <a href="">Mexico</a> and <a href="">India</a> – the city of Sarasota provided an admirable example of how to release the tension surrounding a contentious issue.</p> <p class="p1">The city commission recognized that the regulations it had in mind – background checks, insurance requirements and vehicle standards – were similar to policies already being practiced by ridesharing companies. In their desire to satisfy their customers, Uber, Lyft and the others are actually <a href="">self-regulating</a>. This is the unanticipated beauty of the market – that competition between companies leads to increasingly better provision of services. If a company fails in this, Sarasota Commissioner Liz Alpert observed, "<a href="">they're going to be out of business</a>."</p><p class="p1"><a href="">Continue reading</a></p> Tue, 06 Oct 2015 15:01:20 -0400 Distinguishing Policy from Politics in the Cadillac Plan Tax <h5> Expert Commentary </h5> <p class="p1">The Affordable Care Act’s “Cadillac plan tax” has been much in the news of late. &nbsp;A motley collection of <a href="">health sector companies</a>, <a href="">conservative ACA opponents</a>, <a href="">labor unions</a> and <a href="">presidential candidates</a> is working for repeal. &nbsp;On the other side&nbsp;<a href="">101 health policy experts</a> recently wrote to urge Congress to retain the tax “unless it enacts an alternative tax change that would more effectively curtail (health care) cost growth.” This piece will explain the basics of the Cadillac plan tax, some of the policy and political reasons for its enactment, and why its current precarious status was both predictable and predicted.</p> <p class="p1">The Cadillac plan tax is a 40 percent excise tax, starting in 2018, on the amount by which health insurance plans’ annual premiums exceed $10,200 (individual) or $27,500 (family). &nbsp;After 2020 these threshold amounts are indexed to general price inflation which – because health costs tend to rise faster than that – means that over time more and more plans will be subject to the tax. &nbsp;The finances of the ACA depend to a significant extent on this projection that the tax will hit increasing numbers of plans. &nbsp;This would produce a growing stream of <a href="">federal revenue</a>, funding part of the law’s ambitious expansion of subsidized health coverage.</p> <p class="p1">The origins of the tax lie in a longstanding health policy problem – specifically, the federal tax preference for employer-sponsored insurance (ESI). &nbsp;The problems with this longstanding tax distortion are too many to be fully described here, but among them are: it <a href="">depresses wages</a>, it <a href="">drives up health spending</a>, it’s <a href="">regressive</a>, and it makes it harder for people with enduring health conditions to <a href="">change jobs</a> or enter the individual insurance market. &nbsp;Health economists across the ideological spectrum have long agreed the tax distortion is <a href="">bad policy</a>. &nbsp;Numerous plans have been put forward over the years to eliminate it and to replace it with either a <a href="">standard deduction or tax credit</a> available to all insurance purchasers, not only those with coverage through their employer. &nbsp;</p> <p class="p1">Had the 2009-10 health reform debate been conducted solely on the policy merits, eliminating or at least scaling back the ESI tax preference would have been a centerpiece of the discussion. &nbsp;But unfortunately the ACA was debated shortly after defeated presidential candidate <a href="">John McCain</a> had been successfully attacked for his proposal to replace the ESI preference with a standard credit. The ACA could not become law without the support of many who had joined or countenanced these attacks. &nbsp;Sponsors thus devised the Cadillac plan tax to achieve similar policy objectives but in a different way. &nbsp;The result does not eliminate the underlying tax distortion (i.e., the ESI tax preference), but rather creates a second countervailing distortion (i.e., a new tax), one that starts relatively smaller but is deliberately indexed to expand its reach over time. &nbsp;The intent was that the new tax would both pay for some of the ACA’s spending, while also countering some of the longstanding tax distortion’s effect of driving up general health care costs.</p> <p class="p1">One reason the public discussion over the Cadillac plan tax is so muddled is because of frequent mixing of policy and political considerations. &nbsp;Keeping those issues separate is essential to thinking clearly about the tax. &nbsp;Toward that end, a key policy point experts should communicate clearly to lawmakers is a simple hierarchy of best to worst options:</p> <p class="p1">1) Best: eliminate or scale back the damaging distortion (i.e., no tax preference for ESI)</p> <p class="p1">2) Mixed bag: continue it but have a countervailing distortion (e.g., the Cadillac plan tax)</p> <p class="p1">3) Worst: Continue the distortion without mitigation (ESI preference yes, Cadillac plan tax no)</p> <p class="p1">Purely on policy grounds, consensus expert opinion would rank these choices as above. &nbsp;But too often the public statements of experts, such as in the <a href="">aforementioned letter</a>, obscure this policy guidance. &nbsp;Here this is because some have concluded that political factors require choosing a second-best policy (#2 above) over the best policy of option #1. &nbsp;A weakness of such reasoning is that based on politics alone, #2 is not as attractive as #3, which is the worst policy. &nbsp;So we now have a new tax that is not optimal policy, and which faces rising political opposition as well.</p> <p class="p1">I do not pretend to know the size of the gaps in political attractiveness between #1 and #2, or between #2 and #3. &nbsp;My general philosophy, however, is that policy analysts like myself should remain focused on the relative policy merits, leaving it to elected officials and their staffs to work out political practicalities. &nbsp;There are simply too many ways to go wrong when academics incorporate political counsel into policy pronouncements. &nbsp;Doing so risks going beyond both our expertise and appropriate role.&nbsp;</p> <p class="p1">The Cadillac plan tax is a prototypical example of the complexities of political calculation. &nbsp;It was devised to be more attractive politically than transparently attacking the ESI tax preference. &nbsp;But now it faces strong opposition both from labor unions on the left and anti-tax conservatives on the right, in addition to industry interests. &nbsp;From the outset it was unclear whether the tax was an example of political shrewdness or of being too clever by half. &nbsp;For, as I wrote in my <a href="">2012 paper</a> on the ACA’s fiscal effects:</p> <p class="p1">“Of all of the provisions of the ACA, the Cadillac-plan tax in its current-law form perhaps warrants the greatest skepticism. It is expressly designed to expose an increasing share of health insurance benefits to taxation over time. Moreover, it did not survive its initial clash with political pressures; the form of the tax enacted with the ACA was almost simultaneously amended in accompanying reconciliation legislation, changes that both postponed the effective date and increased the thresholds below which the tax would not apply. . . To assume that the tax will always be applied to the letter of current law is to assume that political actors in the future will be far more committed to this tax than even the original authors of ACA were.”</p> <p class="p1">At the time, I wrote this not to criticize the policy intent of the Cadillac plan tax but to note that it was imprudent to commit to all the ACA’s new spending before it was known whether this politically untested tax would produce all of its projected revenue.</p> <p class="p1">In conclusion, let’s consider two possible answers to a legislator’s hypothetical question, “Should we repeal the Cadillac plan tax?”</p> <p class="p1">1) No, unless you pass an alternative tax change that helps mitigate health care cost growth.</p> <p class="p1">2) Yes, you should replace it with a law eliminating the current tax preference for employee compensation in the form of health benefits.</p> <p class="p1">The two answers are substantively very similar. &nbsp;But answer #2 is the superior answer (and in my view what experts should say) because it conveys the most information to lawmakers about optimal policy. &nbsp;#1 can only be justified as the better answer if one incorporates judgments of political feasibility that academics are not generally in a position to make. &nbsp;</p> <p class="p1">It is perhaps ironic that the Cadillac plan tax, born of some political opportunism, is now a target of same. In any case, there are plenty of people much more qualified than I (and other policy analysts) to determine the optimal balance of policy and politics. &nbsp;But if unelected nonpartisan experts don’t make the direct case for best policy, no one else will. &nbsp;We should all be clear that the appropriate policy goal is to remove the current-law tax distortion that has done so much damage to our health care system.</p> Tue, 06 Oct 2015 13:01:33 -0400 Conversations with Tyler: A Conversation with Dani Rodrik <h5> Video </h5> <p><iframe frameborder="0" src="" height="305" width="585"></iframe></p> <p>Tyler and Dani Rodrik discuss premature deindustrialization, the world’s trilemmas, the political economy of John le Carré, what’s so special about manufacturing, Orhan Pamuk, RCTs, and why the world is second best at best.</p><p>For more episodes, visit:<br /><a href=";redir_token=cQLw2zu4FMeBtPXedZpaaWjQTeh8MTQ0Mzg4MzQwNUAxNDQzNzk3MDA1"></a></p> Sat, 03 Oct 2015 14:01:47 -0400 Conversations with Tyler: A Conversation with Luigi Zingales <h5> Video </h5> <p><iframe frameborder="0" src="" height="305" width="585"></iframe></p> <p class="p1">Tyler Cowen and Luigi Zingales discuss Italy, Donald Trump, Antonio Gramsci, Google and conglomeration, Luchino Visconti, Starbucks, and the surprisingly high productivity of Italian cafés.</p> <p class="p1">For more episodes, visit:<br /><a style="font-size: 12px;" href=";redir_token=cQLw2zu4FMeBtPXedZpaaWjQTeh8MTQ0Mzg4MzQwNUAxNDQzNzk3MDA1"></a></p> Fri, 02 Oct 2015 11:04:10 -0400 Adam Thierer | Internet of Things: Better Policy and Regulation | Regulation University <h5> Video </h5> <iframe width="560" height="315" src="" frameborder="0" allowfullscreen></iframe> <p>The world today is seemingly always plugged into the Internet and technologies are constantly sharing data about our personal and professional lives. Device connectivity is on an upward trend with Cisco estimating that 50 billion devices will be connected to the Internet by 2020. Collection and data sharing by these devices introduces a host of new vulnerabilities, raising concerns about safety, security, and privacy for policymakers and regulators.</p><div class="field field-type-text field-field-embed-code"> <div class="field-label">Embed Code:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> &lt;iframe width=&quot;560&quot; height=&quot;315&quot; src=&quot;; frameborder=&quot;0&quot; allowfullscreen&gt;&lt;/iframe&gt; </div> </div> </div> Tue, 06 Oct 2015 15:31:46 -0400 The Future of Health Care in Virginia: A Discussion on Certificate of Public Need Laws <h5> Events </h5> <p>The U.S. health care system is as complex as it is crucial. Some of that complexity stems from a little known and less understood regulation, common in many states. Known as “certificate of need” (CON) laws these regulations require providers to obtain permission from a state board before they may open a new facility, expand an existing facility, offer a new service, or purchase a new piece of equipment.</p> <p>Currently, the <b>Commonwealth of Virginia </b>— along with 35 other states and the District of Columbia — maintains a CON program or as Virginia refers to it as “certificate of public need” (COPN) program. Many states contend that these programs increase care for the needy while many hospitals claim they are vital to ensuring quality health care.</p> <p>The <b>Mercatus Center at George Mason University</b> invites you to join Mercatus Center researchers Thomas Stratmann and Christopher Koopman as well as Vice President and General Counsel of the Virginia Hospital &amp; Healthcare Association <b><a href="">Brent Rawlings</a></b> for a discussion of Virginia’s COPN program. &nbsp;Former Virginia Delegate Chris Saxman will moderate the discussion.</p> <p>Though space is limited, this event is free and open to the public, all General Assembly Members, and all state agency staff. Lunch will be provided.<i> </i></p> <p><i>Questions? Please contact Brittany Hunter at </i><a href=""><i></i></a><i> or 703-993-8297.</i></p> Fri, 09 Oct 2015 10:44:04 -0400 How the Unseen Effect of Regulation Harms Economic Growth <h5> Expert Commentary </h5> <p class="p1">The <a href="">2015 Economic Freedom of the World report</a> was recently released and out of the 157 countries ranked the United States fell <a href="">from the 12th slot in 2014</a> to 16th. This includes an especially low rank of 49th in the category “Business regulations,” which is probably not surprising to any U.S. business owner.</p> <p class="p1">According to the Mercatus Center’s <a href=";regulator%5b%5d=0">RegData</a> database, federal restrictions on business activities increased 28 percent from 1997 to 2012. While these regulations may be well intentioned, excessive rules and restrictions can have pernicious effects on the economy.</p> <p class="p1">A new study that uses RegData shows that <a href="">federal regulations decrease new hiring</a>. In addition to this direct, negative effect on economic activity, there is an unseen effect — the businesses that are never started because potential entrepreneurs are discouraged by all the red tape in their path.</p> <p class="p1">Along with the decline in new hiring, the aforementioned study shows that more regulated industries experience fewer new entrants into the market each year. This unseen effect negatively affects economic growth in the long run and the short run.</p> <p class="p1">An agency rule, restriction or regulation may not seem like a big deal on its own, but the cumulative effect can be death by a thousand cuts. For instance, the combination of new $5-per-hour parking meters and a local rule requiring establishments to verify that at least 80 percent of their business comes from the local area contributed to the recent closure of a <a href="">100-year-old fruit store in Palm Beach, Fla</a>.</p> <p class="p1">If you talk to any local business owners you know, you may get a list of similar complaints about the costs — in money, time, effort and lost opportunities — that their local government places on them. How many hopeful entrepreneurs, discouraged by the plethora of local regulations obstructing their path, decide that starting a business just isn’t worth the hassle?</p> <p class="p1">Economists have long maintained that profit and loss are important signals, which relay information about the most efficient use of scarce resources. Like losses, firm failures also serve a useful function. A recent study in the Journal of Regional Science <a href=";jsessionid=19A77F3AACDC1B1F93E5AD2540CF6C10.f04t03?userIsAuthenticated=false&amp;deniedAccessCustomisedMessage=">finds evidence that both firm openings and closings positively affect subsequent entrepreneurship and employment growth</a> in metropolitan areas. The researchers contend that firm closings — when combined with new openings — transmit valuable information to future entrepreneurs about the local economic environment such as the level of demand, availability of financing, and quality of the labor force.</p> <p class="p1">The more information prospective entrepreneurs have, the less likely they are to err, which increases their chance of success. This conclusion is probably not surprising to anyone who has ever learned what not to do by watching someone else make a mistake.</p> <p class="p1">Regulations at both the federal and local level can prevent the information transmitted by firm openings and closings from ever materializing. This is because many regulations act as a barrier to entry that prevents entrepreneurs from ever serving a single customer. We can never know how many potential entrepreneurs have tried to start a business, only to run into some regulatory hurdle that made it impractical to continue. This type of “failure” is unseen and as such it doesn’t provide the same level of information to other entrepreneurs that traditional failures do.</p> <p class="p1">Federal regulations get most of the attention, but each local government has its own set of building codes, permit procedures, tax remittance laws, zoning regulations, architectural review boards, etc., which every entrepreneur must comply with. For example, local <a href="">Landmark Commissions</a> and Historical Preservation Boards <a href="">routinely block the demolition of vacant, privately owned buildings that haven’t been used in years</a>. This delays business plans and costs money.</p> <p class="p1">Cities and states that are struggling with population decline and business flight should take a serious look at their regulatory environment and get rid of unnecessary and overly burdensome regulations. Local governments that streamline their regulations will create a friendlier environment for aspiring entrepreneurs, and this can generate economic growth in both the short and long run.</p> Tue, 06 Oct 2015 15:00:40 -0400 How to Fix the Social Security Disability Insurance Program <h5> Expert Commentary </h5> <p class="p1">As I noted in my previous MarketWatch <a href="">column</a>, the Social Security Disability Insurance (SSDI) program faces real and increasingly urgent financial challenges. Absent legislative action to shore up the program's finances, benefits will automatically be cut by almost 20% upon the trust fund's depletion sometime near the end of 2016 — roughly one year from now. Such an outcome would be unconscionable for individuals with disabilities who rely upon this program, and bipartisan action must be taken to avoid it. Unfortunately, differences among policymakers over how best to address this issue have stymied action thus far.</p> <p class="p1">For this reason, the Bipartisan Policy Center (BPC) convened a <a href="">working group</a>, of which I am a member, to find areas of common ground for improving the SSDI program. The group includes members from across the political spectrum with a variety of backgrounds and viewpoints, including academics, policy researchers, advocates for people with disabilities, representatives of the labor and business communities, and former congressional and agency staff.</p> <p class="p1">Put simply, this was no easy task. Members of the group met regularly over the past year, put aside their differences and made compromises in order to develop a <a href="">package of recommendations</a> that all of us could support.</p> <p class="p1">The first finding of the group is that no realistic reform options are available to restore SSDI Trust Fund solvency in the near term. Decades of delay in addressing this financing problem have led to the current predicament. Significant tax increases are unlikely in the current political environment, and sudden reductions in benefits would harshly affect those most vulnerable in society. Thus, Congress and the President should pass legislation before the end of 2015 and not wait for the disability-trust-fund depletion near the end of 2016. Acting this year would eliminate the threat of overnight cuts and provide additional time for evidence-gathering and discussion of longer-term adjustments that could be made to the program.</p> <p class="p1">But legislation addressing trust-fund depletion should not stop there. The working group strongly recommends that any legislation that results in shifting resources between Social Security's retirement trust fund and the disability trust fund, such as a payroll-tax reallocation or inter-fund borrowing, should also include a reform package to improve some of SSDI's program integrity issues, such as reducing barriers standing in the way of those wanting to return to work, and ensuring adequate funding for the Social Security Administration to do the job it has been tasked to do.</p> <p class="p1">While SSDI program rules contain an array of work incentives and supports, other provisions make it difficult to remain in, or return to, the workplace even for those whose conditions improve and who wish to test their capacity to work.</p> <p class="p1">For example, if an SSDI beneficiary earns even one dollar above the substantial-gainful-activity level (currently set at $1,090 per month), they risk losing their entire benefit. We propose program changes and pilots that would explore ways to smooth this "cash cliff" so beneficiaries can attempt to work without fear of steep financial penalties. This could result in higher employment and reduced reliance on the disability program in the future.</p> <p class="p1">The BPC also proposes a number of changes to improve the effectiveness of the procedures by which the Social Security Administration (SSA) evaluates applications to the program and periodically reviews benefits.</p> <p class="p1">Furthermore, it recommends that all of SSA's operations be fully funded and efficiently executed to help clear out a backlog of cases and provide each application and benefit review with the attention it deserves.</p> <p class="p1">To be sure, a payroll-tax reallocation or inter-fund borrowing, along with the group's suggested improvements to program integrity and operations, will not solve the long-term financing problems of SSDI. Also, the recommended pilot programs will not magically return everyone to work. But together, these changes will provide the funds necessary to pay full benefits beyond next year and some breathing room for pilot programs to be designed, implemented, and analyzed for lessons that can be applied to potential national reforms for the long-term improvement of the SSDI program.</p> Mon, 05 Oct 2015 12:14:16 -0400 Cheating Gets the Most Attention, but Doesn't Do the Most Damage <h5> Expert Commentary </h5> <p class="p1"><b><i>The New York Times Room for Debate</i>&nbsp;posted this question:<br /></b></p><p class="p1">Has the pervasiveness of cheating made moral behavior passé?</p><p class="p1"><b>Tyler Cowen provided the following response:</b></p><p class="p1">The behavior of Volkswagen has been heinous and the company and probably some of its executives deserve some serious punishments. Yet our reaction to the scandal is as illuminating as the misbehavior itself. We get much more upset when people do wrong out of deliberate fraudulent intent rather than through accidental negligence, or sheer inability to solve problems, even if the latter phenomena are often the greater risks.</p> <p class="p1">The falsification of Volkswagen emissions software has meant more nitrogen oxide in the air, but how costly is this extra pollution in economic terms? One plausible estimate suggests <a href="">this additional pollution has been killing 5 to 27 Americans each year</a>, with that number worldwide reaching up to 404 as a maximum.</p> <p class="p1">To put that number in context, the World Health Organization <a href="">estimates that about seven million people die each year worldwide from air pollution</a>. Even within the United States, early deaths from air pollution <a href="">have been estimated to run about 200,000 a year</a>, in comparison to which the losses from the Volkswagen scandal are a rounding error. For the American deaths, however, the culprits are often cars, trucks and cooking and heating emissions, so there is no single, evil, easily identified wrongdoer at fault. As Pogo recognized, often the real enemy is us.</p> <p class="p1">Although the practice is ethically controversial, some economists believe we can attach dollar values to human lives. A typical value of life, estimated by this method, <a href="">might run in the neighborhood of $7 million</a>. That would mean Volkswagen has been destroying perhaps around $100 million in value a year. To put that number in context, a single Picasso painting can cost that much, or a Hollywood studio might spend (waste?) that much money <a href="">marketing a single blockbuster movie</a>.</p> <p class="p1">Admittedly, the individuals and families who lose those lives don’t view the matter in such abstract, impersonal terms, but still if we had an extra $100 million we could save at least 5 to 27 lives through safety investments in other areas; in that sense the use of the figure is meaningful.</p> <p class="p1">We need to ensure that deliberate corporate fraud does not spread, but in the meantime let’s not forget that is not always the biggest problem. It just bugs us more.</p> Wed, 30 Sep 2015 13:44:32 -0400 Reconsidering the SIPC <h5> Publication </h5> <p class="p1">Chairman Crapo, Ranking Member Warner, and members of the Subcommittee, I appreciate the opportunity to testify today on your subcommittee’s oversight of the Securities Investor Protection Corporation.&nbsp;</p> <p class="p1">My name is J.W. Verret. I am an assistant professor of law at George Mason University Law School, where I teach corporate, securities, and banking law. I serve as a senior scholar at the Mercatus Center at George Mason University and until recently I was chief economist and senior counsel at the House Committee on Financial Services.&nbsp;</p> <p class="p1">The explosive growth in federally backed loan and guaranty programs has been an appropriate focus of congressional oversight in recent years. The Office of Management and Budget (OMB) estimates the federal government supports over $3 trillion in loans and guarantees. Those loans and guarantees are often shrouded by indirect government support and unreasonable assumptions in government accounting practices.<sup>1</sup>&nbsp;</p> <p class="p1">I submit that the Securities Investor Protection Corporation’s (SIPC) provision of securities custody insurance should be an appropriate part of that conversation. Government officials appoint SIPC directors and SIPC enjoys access to a $2.5 billion line of credit with the Department of the Treasury. Some may argue that statutory language that “SIPC shall—not be an agency or establishment of the United States Government” suggests otherwise.<sup>2</sup> We all recall how similar statutory language governing the government-sponsored enterprises proved meaningless when those companies were placed in federal conservatorship.&nbsp;</p> <p class="p1">Today I will argue that privatization of SIPC is the best solution to protect American taxpayers. I will identify unexplored solutions for victims of Ponzi schemes. Though I argue privatization is the first best solution, I am glad to constructively engage in this subcommittee’s discussion about additional SIPC reforms.&nbsp;</p> <p class="p2">REFORMING THE GOVERNMENT MONOPOLY&nbsp;</p> <p class="p1">Most broker-dealers and members of national exchanges are required by statute to be members of SIPC, and SIPC is funded by assessments on its membership. SIPC thereby enjoys a statutory monopoly over the provision of securities custody insurance beneath the ceiling of its coverage.&nbsp;</p> <p class="p1">Some of my fellow panelists may argue that SIPC serves an important role as a specialized liquidator of broker- dealers. Assuming that argument is true, it remains a tall leap of logic to further contend that a government monopoly in the provision of securities custody insurance is thereby warranted.&nbsp;</p> <p class="p1">SIPC’s board is currently composed of private sector and government members. I submit that privatization of SIPC’s insurance function is the first best solution to the problems presented by the current structure of the SIPC. We might begin by lowering the ceiling of coverage.&nbsp;</p> <p class="p1">I find it hard to accept that a market failure necessitates a government monopoly in this space. In fact, there are underwriters at Lloyd’s that sell “excess of SIPC” coverage for the portion of this market not crowded out by SIPC.<sup>3</sup>&nbsp;</p> <p class="p1">In the absence of full privatization, the public-private composition of SIPC’s board should not be viewed as a second best option. It would be better to officially recognize SIPC for the government entity that it is, remove the private-sector board members, establish a similar level of congressional accountability for SIPC to that required of other government agencies, and impose a term limit on its CEO.&nbsp;</p> <p class="p2">THE PROBLEM OF PONZI SCHEME VICTIMS&nbsp;</p> <p class="p1">The controversy and subsequent litigation between the SEC and SIPC with respect to the Allen Stanford Ponzi scheme, and issues with respect to Bernie Madoff victim claims, also suggest that a warning label should be provided as part of the legend describing SIPC coverage. This label would warn customers, “SIPC coverage only applies under limited circumstances, and SIPC reserves the right to deny claims despite reasonable expectations of coverage.” SIPC won the Stanford litigation as a result of regrettable stipulations of fact by the SEC. In the related Madoff litigation, SIPC utilized an aggressive valuation methodology from among a range of methods used in prior cases.&nbsp;</p> <p class="p1">My impression of both cases was that they were close calls that might have come out either way. It is nevertheless also clear to me that SIPC’s aggressive litigation position was designed to minimize claims to a fund that was unprepared for those claims, which suggests a clear conflict of interest for the receivers hired by SIPC and for SIPC itself.&nbsp;</p> <p class="p1">I am not here today to re-litigate those cases or to endorse legislation that might ultimately result in new assessments by SIPC. I sympathize with the victims, and I recognize they have been subjected to unusually aggressive legal posturing by SIPC, but I worry about action that might only further entrench SIPC’s insurance monopoly.&nbsp;</p> <p class="p1">I would suggest instead that this subcommittee consider whether undistributed funds in the SEC’s Fair Funds program or in the Consumer Financial Protection Bureau’s settlement awards would better serve the purpose of making these victims whole.&nbsp;</p> <p class="p1">I thank you for the opportunity to testify, and I look forward to answering your questions.&nbsp;</p> Wed, 30 Sep 2015 10:46:28 -0400 Curbing Wasteful Year-End Federal Government Spending: Reforming "Use It or Lose It" Rules <h5> Publication </h5> <p class="p1">Good afternoon, Chairman Paul, Ranking Member Baldwin, and members of the Subcommittee. Thank you for inviting me to testify today.</p> <p class="p1">My name is Jason Fichtner, and I am a senior research fellow at the Mercatus Center at George Mason University, where I research fiscal and economic issues, including Social Security. I am also an affiliated professor at Georgetown University, Johns Hopkins University, and Virginia Tech, where I teach courses in economics and public policy. Previously I served in several positions at the Social Security Administration, including deputy commissioner (acting) and chief economist. All opinions I express today are my own and do not necessarily reflect the views of my employers.</p> <p class="p1">I would like to begin by thanking Chairman Paul and Senator Baldwin for the leadership you provide this committee to ensure that important public policy issues involving the federal budget and the stewardship of federal tax dollars get the attention and debate they deserve. I also appreciate that you ensure ideas and viewpoints from all sides are shared in a collegial and respectful manner. It is a privilege for me to testify before you today.</p> <p class="p1">My testimony focuses on two key issues: first, the extent to which perception of a year-end spending problem is reality and second, how various reforms would improve the efficiency of spending by federal government agencies and departments.&nbsp;</p> <p class="p1">From this discussion, I hope to leave you with the following takeaways:</p> <ol class="ol1"> <li class="li1">While anecdotes and media stories of year-end spending surges are widespread, empirical evidence for year-end spending surges and use-it-or-lose-it spending—or the motivation behind this spending—is significantly less available. However, my research and recent research by other scholars is beginning to demonstrate empirical evidence that a year-end spending phenomenon is real and potentially wasteful.</li> <li class="li1">Allowing federal agencies limited rollover or carryover authority could reduce wasteful year-end spending splurges. Similar reforms at the state level and internationally have shown promise, but more research is still needed.</li></ol> <p class="p3">YEAR-END SPENDING: ANECDOTAL VS. EMPIRICAL EVIDENCE</p> <p class="p5">The use-it-or-lose-it phenomenon refers to the propensity of US government agencies to spend unused financial resources toward the end of the fiscal year. This spending is allegedly driven by fear that leftover resources will be returned to the Department of the Treasury and will prompt future congressional budget cuts for the agency. Anecdotes and media stories of year-end spending surges are widespread, but empirical evidence for year-end spending surges and use-it-or-lose-it spending, or the motivation behind them, is significantly less available.&nbsp;</p> <p class="p5">Recent research suggests that year-end spending surges exist and may facilitate wasteful spending. In their 2013 paper, economists Jeffrey Liebman and Neale Mahoney analyze data from the Federal Procurement Data System and the White House’s IT Dashboard to show that not only is there a surge in federal spending at the end of the year, but also this spending is of lower quality. According to Liebman and Mahoney, at the end of a fiscal year, “the prospect of expiring funds” causes agencies to spend all their remaining resources, “even if the marginal value is below the social costs of funds (our definition of wasteful spending).” A 2009 International Monetary Fund report found that year-end spending surges are a “commonly observed phenomenon in government administrations.” Such surges have occurred in Canada, Taiwan, and the United Kingdom, to name a few countries.</p> <p class="p4">Given how few empirical analyses of year-end US agency spending exist, I developed my own analysis of federal contract spending trends with my coauthor, Robert Greene. We analyzed publicly available data from related to spending on prime contracts awarded by executive departments. My analysis focused on this type of spending—which comprised roughly 12 percent of total 2013 federal spending—because the data are readily available through the data archive. Data were downloaded containing detailed information on all contracts executed by each executive branch department for fiscal years 2000 through 2013.</p> <p class="p5">My research shows that a remarkably large percentage of executive branch contract spending occurred near the end of the fiscal year. If an agency were to spread its contract spending evenly over a 12-month period, roughly 8.3 percent of spending would occur in each month. However, in the last month of fiscal year 2013, September, the Department of State spent 38.8 percent of its contracting expenditures and the Department of Health and Human Services spent 28.7 percent. Not all agencies exhibited a year-end surge in spending. For example, the Department of Energy spent only 6.0 percent of its annual contract expenditures. But as the data show, most federal agencies were well above 8 percent, and many were above 16 percent. Between 2003 and 2013, across all executive departments, 16.9 percent of obligated contract expenditures occurred during the month of September—more than twice what we would expect if spending were split evenly over 12 months at 8.3 percent per month.</p> <p class="p5">The pattern of year-end spending surges is evident across all the fiscal years analyzed and is not unique to the current administration or the past few Congresses. Year-end spending surges have become the norm, regardless of administration, party control of Congress, or delays in finalizing agency appropriations.</p> <p class="p3">POLICY RECOMMENDATIONS</p> <p class="p5">Academic research and some anecdotal evidence suggests that the current budget rule of use it or lose it is not optimal and may be encouraging wasteful spending of taxpayer dollars. The question remains: If such spending is indeed wasteful, what can be done to reduce it?</p> <p class="p5">One idea is to allow agencies <i>limited rollover</i> (also known as carryover) authority for funds not spent by the end of the fiscal year. The federal government could begin with a pilot exercise to test the merits of limited rollover authority. Within certain federal departments, agency subcomponents should be given the authority to roll over up to 5 percent of the contract budget authority into the next fiscal year. To maximize success in reducing waste, the rollover accounts of agency subcomponents should be segregated. The separation of accounts increases the incentive to save, as only the agency subcomponents that achieve cost savings will be able to deploy those savings in subsequent fiscal years. Departments or agencies that wish to participate in the pilot program could submit a request to Congress, which could direct the Government Accountability Office (GAO) to oversee, audit, and evaluate the program.</p> <p class="p5">A legitimate concern regarding carryover accounts is that they could have the perverse consequence of decreasing government accountability by serving as annual “rat holes.” Requiring midyear budget reviews could help address this concern and would further curb year-end spending surges. Executive departments should be required to submit midyear budget reviews to Congress and the GAO. These reviews would detail, by agency subcomponent, the anticipated expenditures for the remainder of the fiscal year, the anticipated surpluses at the end of the fiscal year, and the reasons for these surpluses. Midyear reports with similar components have yielded success in reducing use-it-or-lose-it pressures and year-end spending surges when tried at home in Oklahoma and overseas in Taiwan. Of course, these midyear reviews would have limited value if Congress fails to conduct appropriate oversight. If Congress fails to do so, these reports may just become mere paperwork exercises.</p> <p class="p5">To further curb waste, an agency would be allowed to carry over up to 5 percent into a rollover account, but agencies would be permitted to carry over only 50 percent of any remaining balance in those accounts into the subsequent fiscal year. To avoid lengthy delays in the spending of rollover fund savings and to discourage large accumulations of rollover funds, such funds should be spent within two years.</p> <p class="p5">These reforms may create undesirable new administrative burdens and could disrupt existing budgeting practices. However, the short-term costs would be outweighed by long-term benefits. These benefits include relieving agencies of a perceived pressure to spend remaining resources at the end of the fiscal year to protect their budgets from cuts, along with the public benefit of reducing wasteful expenditures associated with that pressure to spend. Furthermore, even if year-end spending spikes were not inherently wasteful, enabling executive departments to manage their budgets without artificial deadlines would likely improve the efficiency of spending by the departments and their subcomponents.</p> <p class="p1">A pilot program that gives limited rollover authority to several departments, combined with congressional and GAO oversight of rollover accounts, would be a useful experiment to see whether these changes to the federal budget process would reduce wasteful year-end spending.&nbsp;</p> <p class="p2">Thank you again for your time and this opportunity to testify today. I look forward to your questions.</p> Wed, 07 Oct 2015 13:18:36 -0400 Restoring Freedom of Contract between Doctor and Patient in Medicare Part B <h5> Publication </h5> <p class="p1">In the five decades since the enactment of Medicare, the federal government has increasingly restricted the freedom of doctors and Medicare-eligible patients to contract privately for supplemental or alternative health services. Today physicians face sharply below-market payments from Medicare, stringent price controls, increased regulations, and at times incompetent and arbitrary administration by the program’s bureaucracy. As this trend continues, it could drive more doctors away from Medicare, potentially leading to a crisis like that in Medicaid—the health program for low-income people—in which many patients have great difficulty finding doctors willing to treat them.</p> <p class="p2">While some will respond by calling for more rules and limits on nonparticipating physicians, a better solution lies in the opposite approach: providing more flexibility for Medicare patients and their doctors to contract for services free of undue federal regulation.</p> <p class="p2">A new study published by the Mercatus Center at George Mason University describes how such an approach in Medicare Part B—which covers outpatient services such as office visits and preventive care—could enhance doctors’ participation in the program, expand choices for beneficiaries, boost innovation, and make prices more responsive to market forces. Below is a brief summary of this analysis. Please see “<a href="">Restoring Freedom of Contract between Doctor and Patient in Medicare Part&nbsp;B</a>” to read the entire study and to learn more about its author, David E. Bernstein, the George Mason University Foundation Professor at George Mason University School of Law.</p> <p class="p3">THE GRADUAL EROSION OF FREEDOM TO CONTRACT</p> <p class="p2">Doctors who participate in Medicare Part B can bill the program directly but may not charge anything higher than Medicare-established fees; the patient pays a 20 percent copay. Nonparticipating physicians may collect basic fees from Medicare or from the patient (who is then reimbursed by Medicare), plus a 20 percent patient copay. For roughly the first two decades of the program, Medicare placed no restrictions on any additional charges and services nonparticipating doctors and their patients agreed to.</p> <p class="p2">Starting in 1984, faced with double-digit increases in Medicare costs, Congress froze physician payments for two years and later imposed new regulations. The combination reduced the inflation-adjusted value of Medicare reimbursements, tempting physicians to become “nonparticipating” so they could try to collect market rates. This led Congress to discourage nonparticipation:</p> <ul class="ul1"> <li class="li4">New legislation prohibited nonparticipating physicians from charging patients more than a “limiting charge” (or “excess charge”) of 15 percent above Medicare fees.</li> <li class="li4">The Balanced Budget Act of 1997 dictates that any doctor who contracts privately with a Medicare enrollee—even if only for one service—has opted out of Medicare and may not receive program reimbursements for two years.</li> <li class="li4">Physicians who opt out of Medicare are not free to contract with Medicare-eligible patients without substantial government interference—interference that does not apply to non-Medicare-eligible patients who similarly wish to contract with their doctors. This includes meeting 15 requirements for each contract. Among these requirements, opt-out doctors must make available to the government all private contracts with patients who have not totally opted out of Medicare.</li> </ul> <p class="p2">Opt-out physicians who fail to comply with the government’s regulations are penalized by having all their contracts with Medicare-eligible patients voided so they can submit only Medicare-covered items for reimbursement and may not collect any of the fees they contracted for.</p> <p class="p3">WHAT CONGRESS SHOULD DO NOW</p> <p class="p2">As a centralized, top-down program, Medicare Part B determines prices for medical services not on the basis of supply and demand, as the market does, but through bureaucratic fiat. The program has 16 different payment systems for various types of providers and health plans and sets prices for more than 7,000 services in each of 89 payment localities. As a result, Medicare is bound to make errors, overpricing or underpricing certain services, and leading some specialists to avoid taking Medicare patients at all. Compounding these problems are constant budgetary and regulatory pressures in the program.</p> <ul class="ul1"> <li class="li4">Medicare currently pays physicians on average 20 percent less than what private insurers pay, and these fees are subject to additional cuts owing to budgetary pressures.</li> <li class="li4">These low reimbursement rates are accompanied by onerous regulations, including a new one, effective this year, that penalizes physicians who fail to make sufficient use of electronic health records.</li> <li class="li4">The Affordable Care Act created the Independent Payment Advisory Board, charged with developing plans to reduce Medicare spending if it exceeds a predetermined per capita growth rate. This poses a further threat to future Medicare payments to healthcare providers.</li> </ul> <p class="p2">These conditions have led a growing number of doctors to leave the program. In 2012, a total of 9,539 physicians had opted out of Medicare, significantly more than the 3,700 who did so in 2009. Although this is not a large share of the 685,000 doctors who participate, it represents a worrisome trend, especially because the figures are largely cumulative: doctors who opt out tend to stay out, and are joined by others.</p> <p class="p2">Some warn that Medicare could face a crisis similar to that in Medicaid, in which a large percentage of physicians refuse to accept patients because of inadequate reimbursements, and some are tempted to provide additional services of questionable value to make up the difference.</p> <p class="p2">The answer to these problems lies not in adding regulations or forcing doctors to participate in the program. Instead, the government should allow greater freedom to contract. This could help relieve some of the stress on Medicare’s finances and encourage physicians to continue serving Medicare patients.</p> <p class="p2">A simple first step would be to eliminate “excess” or “limiting” charge rules, so that nonparticipating physicians could charge market rates for their services, coupled with the following measures:</p> <ul class="ul1"> <li class="li4">Medicare could adopt a system employed by preferred provider organization health plans, which limit reimbursements to patients who obtain services outside the plan. Patients are responsible for the balance. Among other benefits, this system would provide price signals to help determine whether Medicare rates are in fact too low (or too high).</li> <li class="li4">In addition, some Medigap plans—which some Medicare enrollees purchase to supplement their coverage—already cover excess charges, and could play a larger role if nonparticipating physicians were allowed to charge market prices.</li> <li class="li4">Congress also should liberalize Medigap regulations so that such policies can cover additional contingencies and noncovered services, such as office visits exceeding the frequency Medicare deems appropriate.</li> </ul> <p class="p2">Lawmakers also should relax opt-out rules so that they are not all or nothing. For example, physicians should be allowed to participate in Medicare for some percentage of their patients receiving standard, customary services, and still contract privately with other patients seeking services that Medicare does not cover. This approach could lead to greater innovation in health services, which also could help lower costs.</p> Wed, 30 Sep 2015 09:59:24 -0400 The Measured Working Man <h5> Expert Commentary </h5> <p class="p1">Discussions of income inequality typically focus on how information technology raises the return to skilled labor, or on the rise of global trade, or perhaps on the way that politics skews power toward the rich and well-connected. But there’s another fundamental driver of income inequality: the improved measurement of worker performance. As we get better at measuring who produces what, the pay gap between those who make more and those who make less grows.</p> <p class="p1">Consider journalism. In the “good old days,” no one knew how many people were reading an article like this one, or an individual columnist. Today a digital media company knows exactly how many people are reading which articles for how long, and also whether they click through to other links. The exactness and the transparency offered by information technology allow us to measure value fairly precisely.</p> <p class="p1">The result is that many journalists turn out to be not so valuable at all. Their wages fall or they lose their jobs, while the superstar journalists attract more Web traffic and become their own global brands. Some even start their own media companies, as did Nate Silver at FiveThirtyEight and Ezra Klein at Vox. In this case better measurement boosts income inequality more or less permanently.</p> <p class="p1">In any organization or division many colleagues do good work, but only so many would be truly difficult to replace. And those are the people who, with better measurement of economic value, receive higher salaries and bonuses.</p> <p class="p1">Imagine a situation where a group of workers produces some output collectively. The tendency is to resort to equal pay scales, perhaps with some inequality built in for seniority and other highly visible characteristics, such as working overtime. Relatively equal pay structures help build group solidarity, and in the meantime the superior producers cannot easily demonstrate their worth to other potential employers because no publicly observable measurements capture that added value.</p> <p class="p1">But as information about productivity improves, the better workers demand more and can get it; in fact, bosses will want to offer more to preëmpt them from leaving. Workers also stop thinking of themselves as bringing the same value to the table, and that can make inegalitarian pay structures less damaging to morale and thus more attractive.</p> <p class="p1">One unfortunate possibility, or shall I say likelihood, is that some workers may not produce much of anything at all. They may be major shirkers, or perhaps they are smart and talented workers who nonetheless are poison for workplace morale. Their office scheming takes away more than their labor adds. These “zero marginal product” workers, as I <a href="">have labeled them</a> elsewhere, may have a hard time holding down a job. In the modern world it is harder for them to hide behind the labor of others.</p> <p class="p1">Insofar as workers type at a computer, everything they do is logged, recorded, and measured. Surveillance of workers <a href="">continues to increase</a>, and statistical analysis of large data sets makes it increasingly easy to evaluate individual productivity, even if the employer has a fairly noisy data set about what is going on in the workplace.</p> <p class="p1">This analysis, if only in crude forms, starts when workers are applying for a job. A significant percentage of bosses in America <a href="">look up an employee’s credit score before making a hiring decision</a>. Some employers are <a href="">even using performance in online video games to evaluate individual talent</a>. There are also Facebook, Twitter, LinkedIn, and numerous other social-media outlets, all of which do give us some clues about character, effort, and the quality of a person’s social connections. It’s not hard to imagine a future where an individual’s eBay and Uber ratings, among other pieces of information, are up for sale in the marketplace. The more reliable job candidates might disclose such information voluntarily. Over time schools may offer more information about their students than just GPAs and letters of recommendation, as statistical analysis improves in its ability to assess their potential.</p> <p class="p1">Looking further ahead, and more speculatively, employers might request genetic information from workers. Anyone who doesn’t want to turn it over might be seen as having something to hide, and thus this information will spread even if you may feel that our society doesn’t want to tolerate genetic discrimination. Or perhaps the information can be lifted from a doorknob or from a cup of coffee during an interview visit. It’s hard to imagine that this valuable source of information will stay confidential forever, given that most databases have proved hackable.</p> <p class="p1">This explanation for growing inequality has some potentially distressing features, but also some upside.</p> <p class="p1">The upside, quite simply, is that measuring value tends to boost productivity, as has been the case since the very beginning of management science. We’re simply able to do it much better now, and so employers can assign the most productive workers to the most suitable tasks. Workplace incentives can also be more closely geared to the actual production of value for the enterprise.</p> <p class="p1">The downsides are several. Individuals don’t in fact enjoy being evaluated all the time, especially when the results are not always stellar: for most people, one piece of negative feedback outweighs five pieces of positive feedback. To the extent that measurement raises income inequality, perhaps it makes relations among the workers tenser and less friendly. Life under a meritocracy can be a little tough, unfriendly, and discouraging, especially for those whose morale is easily damaged. Privacy in this world will be harder to come by, and perhaps “second chances” will be more difficult to find, given the permanence of electronic data. We may end up favoring “goody two-shoes” personality types who were on the straight and narrow from their earliest years and disfavor those who rebelled at young ages, even if those people might end up being more creative later on.</p> <p class="p1">That said, measurement of worker value isn’t going away anytime soon. The real question is not whether we want it or not, but how to make it better rather than worse. Ideally we’d have a system where individuals can correct measurement errors in their records to prevent injustice and preserve accuracy. We’d also like a system where individuals are not tracked and segmented too early, where outsiders and immigrants receive a fair hearing, where risk taking is rewarded rather than punished, and where some degree of privacy, including privacy in the workplace, remains.</p> <p class="p1">Obviously, that is a tall order.</p> <p class="p1">I wonder, by the way, if <i>MIT Technology Review</i> will tell me how many people clicked on this article.</p> Tue, 29 Sep 2015 11:34:01 -0400 How Uncle Sam Uses Behavioral Science <h5> Expert Commentary </h5> <p class="p1">President Obama has issued an <a href=""><b>executive order</b></a> urging federal agencies to use behavioral-science insights in designing government policies and regulations. The order argues that such insights have the potential to improve consumer welfare through better policy design.</p> <p class="p1">When most people think of behaviorally informed policymaking, they think of the "nudge" — in which the government doesn't mandate a desired behavior, but instead gently encourages it, for example by making it the default. For example, some have suggested making retirement savings and organ donation opt-out rather than opt-in.</p> <p class="p1">This may sound innocuous, but there are two major concerns. First, even with a nudge, regulators must assume the role of arbiters in deciding what constitutes consumers’ best interests. And second, the president's order is not restricted to nudges; regulators reserve the right to impose choices on consumers, even against consumers’ wills, if they deem consumers irrational and unable to make the right decisions.</p> <p class="p1">One can easily see how this may lead to mischief and politically motivated reasoning. The evidence shows that behavioral science is often used to advance political agendas or ineffective policies, rather than consumer welfare.</p> <p class="p1">Consider the Department of Energy, which has been at the forefront of using behavioral science in policymaking. The DOE routinely mandates higher energy-efficiency standards for a wide range of appliances and justifies the regulations using behavioral insights. Specifically, it claims that more efficient appliances are a good buy, making up for their higher prices through energy savings, and blames consumer myopia for the fact that cheaper, less efficient appliances are more popular.</p> <p class="p1">Unfortunately, the evidence marshaled by the agency for consumer myopia is highly dubious. For example, the latest standard for residential <a href=""><b>dishwashers</b></a> promises consumers a savings of $3 over 15 years — it takes twelve years just to cover the higher up-front price — while the standard for <a href=""><b>clothes dryers</b></a> delivers $14 in savings over 16 years, with the higher price covered after five years.</p> <p class="p1">That DOE would declare consumers irrational for not chasing trivial, long-term savings defies common sense. And when one considers the fact that another objective for energy-efficiency regulations is to <a href=""><b>reduce</b></a> greenhouse-gas emissions, it becomes clear that the agency’s motivation may have less to do with improving consumer welfare and more to do with hitting its environmental goals. The use of behavioral insights in policy opens the door for agencies to impose more stringent regulations that aim to advance the administration’s agenda rather than consumer welfare.</p> <p class="p1">Even when the estimated savings are substantial, the regulations may not benefit consumers. Studies <a href="">show</a>that DOE’s estimates are typically based on engineering models that overestimate energy savings. In addition, consumers may be rationally <a href=""><b>concerned</b></a> about the large up-front costs of more efficient appliances, especially in the face of uncertain future savings. Consequently, what looks like an irrational choice to a regulator could in fact be the optimal choice for consumers.</p> <p class="p1">Importantly, economists Ted Gayer and Kip Viscusi <a href=""><b>point out</b></a> that restricting consumer choice is a cost, not a benefit to consumers. The DOE’s practice of counting such restrictions as benefits — and therefore fudging the cost-benefit analysis numbers — has no precedent in traditional economics.</p> <p class="p1">Other policies borne out of behavioral insights do not fare better. Health advocates similarly <b><a href="">blame</a>&nbsp;</b>consumer myopia for the consumers’ failure to choose healthier foods. Consequently, they advocate policies restricting or manipulating consumer choices, even if there is <a href=""><b>no evidence</b></a> for the effectiveness of these policies. For example, the <a href=""><b>ban</b></a> on large soda containers, proposed under New York’s ex-mayor Michael Bloomberg, so infuriated New Yorkers that it produced a <a href=""><b>backlash</b></a> against the policy and was rejected by the courts. Another New York City regulation, which required restaurants to post calorie counts on their menus, <a href=""><b>failed</b></a> to reduce caloric consumption. Despite that fact, the policy was <a href=""><b>adopted</b></a> by the federal government and is now imposed on the rest of the nation. Ironically, proponents of these policies viewed their failure as evidence to <a href=""><b>justify</b></a> even more intrusive regulations.</p> <p class="p1">Interestingly, the executive order notes the need to streamline government processes by “removing administrative hurdles, shortening wait times, and simplifying forms.” This certainly sounds like a good idea. After all, who could argue against reducing government bureaucracy? Yet one need not appeal to the newly fashionable branch of social science to come to this conclusion — it’s simply common sense. In fact, successive administrations have advocated reducing bureaucratic procedures.</p> <p class="p1">At the same time, bureaucracy only grew larger.</p> <p class="p1">My colleagues Patrick McLaughlin and Oliver Sherouse have measured the number of regulatory restrictions imposed by each administration since President Carter. They <a href=""><b>found</b></a> that the number of restrictions has increased by 83 percent since the Carter administration, including an 11 percent increase under President Obama. So while the sentiment expressed in the executive order is laudable, evidence shows that agencies are unlikely to take the directive to heart.</p> <p class="p1">Behavioral insights can lead to better policies, but the government’s track record is not encouraging. Regulators are likely to use behavioral science to justify more stringent and intrusive regulations that serve political agenda and not consumers’ needs. Thus, any promise of better policies should be taken with a grain of salt.</p> Wed, 07 Oct 2015 14:32:05 -0400 Guilty Verdict Puts Food Safety Responsibility Where It Belongs <h5> Expert Commentary </h5> <p class="p1">Guilty! The perpetrator of the 2008-09 <i>Salmonella</i> outbreak, Stewart Parnell of the Peanut Corporation of America, just received a <a href="">28-year sentence</a> for knowingly distributing <i>Salmonella</i>-containing peanuts. The familiar refrain will be that this is evidence that our food safety system is <a href="">broken</a>. But those who believe that the response in 2010, the Food Safety Modernization Act (FSMA), is <a href=";">the answer</a> have it completely wrong. In fact, the results of this court case provide a strong incentive for everyone involved in food safety, from farms to restaurants, to exercise due diligence.</p> <p class="p1">This case proves that innovation like traceback technology (being able to find where a particular food was produced that made people sick) makes it possible for our legal system to punish those who knowingly cause food safety outbreaks. But avoiding prosecution is an added incentive on top of those that already exist.</p> <p class="p1">When a food is found to be contaminated and traced back to the source, the costs rapidly begin to pile up. First, the food will have to be recalled, a costly exercise. Next, people who have been sickened&nbsp;can be expected to sue, and there are both the legal expenses as well as the costs of remedying the harm imposed by the courts. And, in the information age, all of the data go public very quickly and the value of the brand name plummets, as do sales and profits. If that’s not enough, now you also may go to prison, perhaps for a very long time.</p> <p class="p1">Two decades ago, it would have been exceedingly difficult to incur any of these costs by negligent producers. Everyone in the food industry knew how difficult it was to trace a problem back from sickened people to the source. There is always a delay in when you consume a tainted food to when you get sick, from several hours to several months, the latter of which is the case for listeriosis in pregnant women. In order to trace illness back to the source, you needed a lot of people to get sick from the same food and, even then, you couldn’t necessarily prove that a specific food they ate was what made people sick.</p> <p class="p1">The federal government and private firms now have better tools that make traceback and positive identification much more likely. The Centers for Disease Control’s Foodborne Disease Active Surveillance Network (<a href="">FoodNet</a>) was established in 1995 and conducts surveillance for certain pathogen infections that have laboratory-tested samples from patients. There are <a href="">other systems</a> as well, including PulseNet, that can match DNA in food pathogens consumed by ill patients to DNA in food plants or farms. All of this means that there is a much higher probability of being caught today.</p> <p class="p1">What’s more, once a problem has been traced back to the origin, it is possible to figure out the root cause of the problem. This is really important. Posting that root cause of the problem allows everyone in the food industry chain to be aware and will cause the industry to reexamine the millions and millions of food safety contracts to see if they need updating. When that happens, private inspections will incorporate those changes. There are at least 10 times more private than public inspections, which will bring about changes more rapidly than if the responsibility is left to public entities.</p> <p class="p1">What won’t bring about change rapidly is telling everyone to use a 50-year-old technology, known as Hazard Analysis Critical Control Points (HACCP), and then trying to inspect everyone into compliance. That is what FSMA does and, because it is universal, it doesn’t matter whether that technology is useful in a particular situation or not. We’ve tried the regulation-and-inspection route for years, and every year we get the same statistics: 48 million people become sick with foodborne disease. The&nbsp;<a href="">trends over the past 15 years</a> from CDC show mixed results by individual pathogens but not much in the way of progress.</p> <p class="p1">So “guilt” is exactly what is needed and points the way toward a much more effective system of reducing foodborne disease. Put the responsibility back on those in the food chain by giving them the incentives to do the right thing and avoid the disastrous consequences.</p> Tue, 06 Oct 2015 16:10:03 -0400 The High Correlation Between Agency Budgets and Agency Regulations <h5> Publication </h5> <p class="p1">The database <a href=";regulator%5b%5d=0">RegData</a> quantifies the regulatory restrictions produced by each federal regulatory agency each year. We used RegData to merge its agency-specific restrictions data series with data on agency budgets from the <a href="">Regulators’ Budget</a>, produced by the <a href="">Regulatory Studies Center</a> at George Washington University. This combined dataset allowed us to examine the simple correlation over time between the number of regulations an agency had published and the agency’s budget.</p> <p class="p2">Figure 1, below, shows these two series in the aggregate: the total of regulatory restrictions published by all agencies each year and the total of all agencies’ budgets in each year. Restrictions are defined as words used in legal language to either obligate or prohibit an action. RegData specifically searches for a subset of all restrictions, consisting of the strings, “shall,” “must,” “may not,” “prohibited,” and “required,” and tallies them for each agency in each year. Agency budget data is given in millions of constant 2009 dollars.</p> <p class="p3"><a href=""><img src="" width="585" height="402" /></a></p> <p class="p2">These two lines—total agency restrictions and total agency budgets—move in the same direction. In fact, over the period for which we have data (from 1975 to 2014), the simple correlation between total of all regulatory restrictions and total of all agency budgets equals 0.91. (A correlation of 1 would indicate a perfect match.) Note that this figure only includes restrictions for the agencies included in the Regulators’ Budget. RegData covers all government offices that publish in the <i>Code of Federal Regulations</i>, while the Regulators’ Budget is less comprehensive.</p> <p class="p2">Two aspects of figure 1 stand out. First, the common direction they share is upward. Regulatory restrictions and regulatory budgets have grown more or less continuously since at least 1975. Second, there is a large spike in total agency budgets from 2002 to 2003, caused by the surge in employment at the Transportation Security Administration in response to the September 11 terrorist attacks. TSA was formed in 2001 and quickly became one of the largest federal agencies in terms of budgets. However, most TSA employees are engaged in aviation security operations, not in writing regulations.</p> <p class="p1">Figure 2, below, is a scatterplot of restrictions and budgets for all agencies between 1975 and 2014. As one would expect with such a highly correlated series, we observe most points along the 45-degree line. However, at this more granular level, while the correlation between budgets and restrictions remains clear, there is more variance from year to year and agency to agency.</p> <p class="p4"><a href=""><img height="400" width="585" src="" /></a></p> <p class="p1">We have highlighted a sample of three large regulatory agencies: the Environmental Protection Agency (EPA), Occupational Safety and Hazard Administration (OSHA), and the Federal Communications Commission (FCC). Within these three agencies, we note one interesting trend: even though the EPA’s budget has remained nearly flat since year 2000, the number of its restrictions has continued to grow.</p> <p class="p1">While the correlation between agency budgets and the levels of agency restrictions is clearly high, the question of whether one causes the other remains unanswered. If budgets are increased, does regulatory output correspondingly increase? Do budgets change in response to changes in regulatory output? Or is a third factor—such as new legislation directing agencies to regulate or deregulate—the driving force?</p> <p class="p1">This analysis does not answer those questions. Instead, we hope that by highlighting the correlation between these two unique datasets, others will be able to explore the possible relationships between the legislative, budgeting, and regulatory processes.</p> Tue, 29 Sep 2015 10:19:48 -0400